Now that the Republican-sponsored massive tax bill is on its way to the Oval Office, taxpayers have two questions.
The first is, "Will it help or hurt me when I get around to filing my federal tax return in 2019?" A variety of calculators offer some very broad hints as to that answer.
The second is, "Will I see any benefits before the annual tax-filing time?"
GOP members of Congress and the White House say yes. You should see the effect of the new tax rates, specifically more spending money, reflected in your February paychecks, promise Donald J. Trump and his Republican colleagues.
But the actual timing of those increased-for-some paycheck amounts relies on how quickly the Internal Revenue Service can make that happen.
Yep, it's now up to Uncle Sam's tax collector to take the legislative language and turn it into new forms and documents. In this case, this means new W-4 withholding forms for employees to fill out and payroll withholding tables for businesses to use.
Contemplating the payroll challenge: Payroll withholding instructions from the IRS are what companies — or, in many cases nowadays, the payroll firms to whom businesses outsource this task — use to calculate how much income tax to take from each worker's paycheck each pay period.
When the tax reform bill started picking up steam this month, many folks started worrying about the increasingly shorter time frame for the IRS to collect this data and get it to employers to make payroll changes.
That's why the American Payroll Association (APA) on Dec. 11 sent a letter to the chair of the Senate Finance Committee expressing its concern about potential payroll problems and offering some ideas on how to ease possible problems.
The APA said in that letter to Sen. Orrin Hatch (R-Utah) that its 21,000 members representing 17,000 employers were already starting to panic about the tax bill's effect on payroll withholding since the new law's changes will take effect essentially a week after its enactment.
More precisely, payroll officials are freaking out over how they can realistically obtain and process the more than 40 million revised employee W-4 forms needed to make the necessary withholding changes.
This is a herculean task, says the APA, especially given that many companies shut down between Christmas and New Year's Day and even where businesses are open, many employees are using the last of their annual vacation time.
New W-4 data critical: Without the correct W-4 data, under the new tax law many workers will have too much tax taken out of their early 2018 paychecks.
While many people are fine with over withholding — millions intentionally have too much withheld every tax year so they can get a bigger tax refund when they file their returns — that's really not what the GOP or the APA want.
For the GOP, wrong withholding could undercut the promise that workers will see more money in their paychecks thanks to the new tax law.
For the APA, the situation is much direr, according to the letter that APA representatives Michael O'Toole and Alice Jacobsohn sent to Hatch:
"It will turn much of the system, especially the payroll withholding infrastructure that is the underpinning of our entire economy, upside down. With the elimination of personal exemptions under the tax code in favor of doubling the standard deduction, while at the same time providing an "as if there were an exemption" amount to use in determining employee withholding allowances, the bill would make it nearly impossible for employees to complete their Forms W-4 so they could properly calculate their annual federal tax liabilities."
To solve that problem, APA suggests that employers be allowed to continue to apply the 2017 versions of W-4 forms already in payroll systems nationwide throughout next year even though they reflect the use of personal exemptions that are no longer allowed.
For this and other payroll concerns, such as the supplemental withholding rate that applies to compensation such as bonuses, commissions and stock options, the APA argues that employers deserve transition relief throughout 2018 from any penalties for failing to properly withhold or deposit federal income tax.
"Employers and payroll professionals are the main reason that the tax withholding system works in the first place, and making massive changes to the system with an unconscionably short lead time is a recipe for disaster," write the APA reps. "Give the payroll system time to adjust, and America will get what it has gotten ever since withholding began on a regular basis in 1943 – a voluntary tax compliance rate that has increased to over 90%."
The IRS says it's working on it: From prior experience, the IRS knows all too well that it needs to wait for Congress to finally act before the tax agency makes any changes.
Bill changes often are made at the last minute. That indeed happened with the tax bill as it went before the Senate on Dec. 19. Rules used by that body forced some final tweaks and a second vote by the House before the bill could go to the White House for signature.
Still, two days after the APA sent its letter to Hatch, the IRS made it clear that it was monitoring the pending tax legislation's Congressional progress and taking initial steps to prepare guidance on withholding for 2018.
"We anticipate issuing the initial withholding guidance (Notice 1036) in January reflecting the new legislation, which would allow taxpayers to begin seeing the benefits of the change as early as February," the IRS said in a Dec. 13 announcement.
As part of that guidance, the IRS added that it "will be working closely with the nation's payroll and tax professional community during this process."
The workers' role: So what do workers do? Wait.
Wait for a new Form W-4 from the IRS.
Wait for word from your employer about what to do before then and then, once the W-4 is ready, how to submit it to the payroll office.
Then when your new payroll withholding takes effect, take a look at just how close that will be to your final tax bill.
While the tax law has changed dramatically, one tax planning rule remains the same. Your withholding tax goal should be to have enough — no more, no less — to cover your eventual tax bill.
That way you, not Uncle Sam, will have control over your cash throughout the year.
You also won't have to wait for any tax refund — remember, another tax law demands that some returns that claim certain tax credits be held until mid-February — or worry about it being stolen by tax identity thieves.
So as we get deeper into 2018, run your tax numbers under the new law and, if necessary, adjust your withholding by filing yet another W-4 with your employer.
You also might find these other tax reform posts of interest:
- Highlights of the GOP tax bill that's about to become law
- More (oh joy!) GOP tax bill proposed changes
- How taxes on pass-through businesses would work under the GOP tax plan